Last week was mainly bearish as several macro events had a detrimental effect on the industry. Major developments, such as the voluntary liquidation of Silvergate and the crash of Silicon Valley Bank (SVB), disrupted the industry, resulting in a sell-off that pushed asset prices to multi-month lows. In addition, regulatory efforts in the United States were mostly unfavorable, exacerbating concerns and uncertainty.
Silvergate’s voluntary liquidation
Two weeks ago, concerns regarding Silvergate’s stability escalated after the bank postponed its yearly 10-k submission to the United States Securities and Exchange Commission (SEC). The decision raised worries about the possibility of insolvency and its potential impact on crypto.
The Silvergate saga spilled into the previous week, bringing new developments. As the bank’s woes continued amid disclosures of its underperforming stock and mass withdrawals, bankruptcy concerns rose as of last week.
Following these events, additional reports surfaced indicating that Silvergate Capital, the parent company of Silvergate, had entered into discussions with the U.S. Federal Deposit Insurance Commission (FDIC) to chart a course through the current turbulence. Anonymous sources revealed that securing investments from crucial market players was one potential option under consideration.
However, on Mar. 10, Silvergate Capital made a public statement indicating its intention to cease operations and voluntarily liquidate the bank’s assets for their best interest. Subsequently, Silvergate’s stock fell 43% in after-hours trading.
In the aftermath of these events, crypto exchanges Binance and Coinbase revealed informed the community that they had zero exposure to Silvergate. Meanwhile, speculation arose regarding the true catalyst for the bank’s downfall. Industry insiders suggest that government regulatory initiatives may have contributed.
Regulatory uncertainty in the U.S. abounds
The regulatory climate in the local crypto industry within the United States also remains a concern among leaders. Last week’s events further exacerbated these apprehensions despite the emergence of potentially favorable discussions.
Ethereum (ETH): a security or commodity?
The New York Attorney General, Letitia James, revealed on Mar. 9 that a lawsuit had been filed against KuCoin, a crypto exchange, for offering security investments to residents of New York without complying with the state’s registration requirements.
According to Attorney General James, assets such as ETH are, in fact, securities alongside terraUSD (UST) and terra (LUNA). She disclosed plans to step up on regulatory efforts to crack down on exchanges persistently violating financial laws and putting investors at risk.
Attorney General James’ stance on whether ETH should be classified as a security or a commodity could establish a precedent which American financial agencies may use to take action against local cryptocurrency exchanges that list the coin.
Gary Gensler, the chairperson of the SEC, has suggested on multiple occasions that assets using the proof-of-stake consensus mechanism are securities. However, he has not explicitly labeled ETH as such. In a recent statement, he hinted that every crypto asset, except for bitcoin (BTC), should be treated as a security, a viewpoint that most bitcoin maximalists support.
However, during a Senate hearing on Mar. 8, Rostin Behnam, the chairperson of the Commodity Futures Trading Commission (CFTC), reiterated his position that ETH and all stablecoins are commodities and not securities. As such, Behnam believes these assets fall under the purview of his agency.
Other regulatory affairs
The U.S. regulatory scene also welcomed other new developments last week. According to last Tuesday’s reports, policymakers in the country, led by Patrick McHenry, the House Financial Services Committee chairman, and Representative Ritchie Torres, seek to reintroduce legislation to clarify the reporting.
Brian Armstrong, the CEO of Coinbase, expressed his approval of the bill McHenry and Torres presented and praised the representatives for their work in promoting regulatory transparency. He believes the legislation will be instrumental in maintaining the United States’ position as a hub of cryptocurrency innovation, particularly in the face of unfavorable legislative measures threatening the industry’s survival.
Meanwhile, Kristi Noem, governor of South Dakota, vetoed House Bill 1193, which seeks to exclude bitcoin and other crypto assets from the definition of money. Noem cited a potential loophole within the bill that could enable the government to sideline cryptocurrencies and position CBDCs as the only viable digital asset.
The Biden administration also introduced an idea to levy a 30% tax on crypto miners in the country. The proposal, enshrined in the Biden administration’s 2024 fiscal year budget, will require cryptocurrency miners to pay a 30% tax on electricity usage. The idea has received widespread backlash within the crypto community.
Silicon Valley Bank’s implosion and contagion
Silicon Valley Bank (SVB), one of America’s largest banks by assets, fell last week, causing tension across the markets that impacted crypto firms with exposure to the lender.
The bank’s rapid decline occurred over a brief two-day period, initiated by the revelation that it intended to raise $2.25b from investors to address a significant shortfall in its balance sheets. This announcement prompted startup clients to withdraw their assets as a precaution against potential exposure to the bank in the event of a collapse.
The bank run resulted in a liquidity crunch. Silicon Valley Bank had disclosed that it had sold bonds at a significant loss of $1.8b due to the repeated interest rate hikes implemented by the Federal Reserve. SVB’s clients are primarily high-profile venture capital-backed technology companies and professionals in the tech industry.
The aftermath of these events hurt the stock market, with shockwaves also being felt in the cryptocurrency industry. California regulators were forced to shut down the bank on Mar. 10, designating the Federal Deposit Insurance Corporation (FDIC) as the receiver to handle the disposal of the bank’s assets.
Circle and BlockFi’s exposure to SVB
On the day following SVB’s collapse, Circle, the issuer of the USDC stablecoin, disclosed that they were exposed to the beleaguered bank. As per a tweet on Mar. 11, Circle revealed that $3.3b of its $40b USDC reserve was held in Silicon Valley Bank and is now inaccessible.
Panic swept through the crypto scene, with some USDC holders scrambling to convert their USDC tokens to other stablecoins. However, two of the largest crypto exchanges, Binance and Coinbase, suspended the conversion of USDC. Binance suspended the auto-conversion of USDC to BUSD, while Coinbase announced that it would temporarily suspend the conversion of USDC to USD. Robinhood also reportedly suspended USDC deposit and withdrawal.
As these events unfolded, USDC’s value depegged from the dollar, plummeting to as low as $0.87 on Saturday morning. The asset has since then staged a comeback, gaining by 4.42% in the past 24 hours. Even so, it still has yet to attain parity with the dollar, currently trading for $0.95 at the time of reporting.
Meanwhile, bankrupt crypto lender BlockFi disclosed in its bankruptcy filing last Friday that it has a $227m exposure to Silicon Valley Bank. The documents revealed that BlockFi’s exposure is not also insured by the FDIC nor covered by any other financial agency.
As chaos stemming from Silvergate and Silicon Valley Bank wreaked havoc, the broader cryptocurrency market posted massive declines for the total crypto market cap below the $1t mark for the first time since January.
The situation was compounded by substantial selling pressure from BTC miners who began liquidating their holdings. According to a report from CryptoQuant on Mar. 9, bitcoin miners’ reserves hit their lowest levels since October 2022. This added to the already challenging market conditions, exacerbating the impact on the cryptocurrency market.
Consequently, bitcoin dropped below $20,000 on Mar. 10, marking the first time the asset has traded below the $20,000 mark since mid-January. Other assets also experienced similar declines, dropping to lows last witnessed in January. Despite struggling to recapture the $20,000 zone, bitcoin eventually closed the week with an 8.4% decline. Moreover, ethereum ended the week with a 6% drop.